The Cost of Failure. Know It.

Frequently, someone will talk to me about an idea, wondering if they should pursue it.  We talk it over, covering many things you'd expect.  How will you sell the idea?  How will you make the product or provide the service?  What can you sell it for and what is the cost?  How many can you sell?

All of these questions are normal and appropriate, but they all have one thing in common.  They are questions that assume a certain level of success with the idea.

I always try to follow up this discussion with another question.  What is your total loss if your idea fails completely?

This is a good question.  It should be a component of any entrepreneurial evaluation. Let's look at some examples based on real experiences I've known of or been part of:

1.  Adding Solar Lighting to an existing product line at my existing company.  We had to make a commitment to purchase about $20,000 worth of products.  Plus, we allocated about $10,000 worth of marketing and sales effort.  If the product was a TOTAL failure, with no sales at all, we'd lose $30,000.  

2.  A guy envisions a novel kind of kitchen appliance for the public.  The tooling charges to get into production are $130,000.  Plus, he has to start a business and run some parts.  (approximately $70,000 more).  Total failure at this point is $200,000.

3.  Buying an existing company that does truck modifications.  The cost of purchase:  $400,000.  Plus, having to inject $200,000 of working capital.  Total loss at this point:  $600,000.  (Yes, this was my experience, and the loss could have been worse.  I've simplified it a bit for this example.)

Any one of these three examples could result in a thriving, profitable business enterprise.  Any one them could be a total flop, or be something in-between.  

It is always good to plan for success, but it is equally important to plan for failure.  You are making a mistake if you don't consider this as a component of your evaluation.  

By the way, each one of these examples are real.  If we do some work together, I'll be glad to tell you "the rest of the story".